Group says third of American homes have no life insurance
By Gregory Karp
Published: Monday, Feb. 13, 2012,
Buying life insurance isn't a sexy purchase, but it's fundamental to financial planning. That's why it's alarming that ownership of policies in America is at a 50-year low.
About a third of American households have no life insurance, according to LIMRA, an insurance industry research group. That's a shame, because life insurance, especially simple term life, is cheaper than ever and could prevent financial disaster for your family. (If nobody relies on your income, you might not need life insurance.)
A 30-year-old can buy $250,000 of 20-year term life insurance for $158 per year, or $3 a week.
The economic downturn undoubtedly shifted Americans' focus away from life insurance to competing priorities for household money, such as putting food on the table. Still, half of U.S. households concede they need more life insurance, the highest level ever found in a LIMRA survey, which is released every six years.
Nearly seven in 10 American households with children under 18 -- those that typically need life insurance most -- said they would be in jeopardy if the primary breadwinner died.
Besides being cash-strapped, another reason people don't buy life insurance is because they don't know much about it, according to the survey.
"People are confused about their choices, and from behavioral economics we know that if someone is not certain that they're doing exactly the right thing, they will tend to do nothing," said Robert Kerzner, CEO of LIMRA. "They have no idea how much it costs, but they have this perception that it's expensive and it can't fit in their budget."
To shed some light, here are some straightforward questions and answers about life insurance, focusing on term insurance.
What is life insurance?
Essentially, it's paycheck replacement if you die. Life insurance is a contract that agrees to pay money to a beneficiary, often several hundred thousand dollars, if you die while the contract is in place.
Term life insurance is in effect for whatever term you buy, such as 10, 20 or 30 years, as long as you keep paying premiums. More complicated forms of insurance, such as whole life, universal life and variable life, often add investment components and are far more expensive. They stay in effect for life if you keep paying premiums.
Who needs it?
Determine whether you need life insurance by answering the question, "Who would miss my paycheck if I died?" If you're single or have a working spouse and no children, you might not need life insurance. But some people like to have a small policy to pay for funeral and burial costs, to make a donation to a charity or to leave an inheritance.
How much do I need?
A common rule of thumb is six to 10 times annual income. That gives you a ballpark figure, but it's inadequate. The amount you need depends on how old you are and how many working years you're looking to replace. Do you want enough insurance to pay off the mortgage, send children to college or pay for a daughter's wedding?
And consider that the payout from a term life policy stays the same, but your expenses are likely to rise over time. Some people might want their family to continue living the same lifestyle if a breadwinner died. Think of all that entails, from food and clothing to health insurance and retirement savings.
"It requires a bit more work than using a rule of thumb," said Byron Udell, founder of online life insurance broker AccuQuote.
How much does it cost?
It depends. Healthy, younger, nonsmoking people pay less because they are less likely to die. Getting a new policy involves filling out forms and undergoing a free medical exam, usually at your home. Results of the exam will help determine what your rate will be. A 40-year-old male nonsmoker in great health might pay $355 a year for $500,000 worth of coverage over 20 years, according to figures supplied by AccuQuote.
Where should I buy it?
You can shop online, with many online brokers offering help by phone, too. Or, you can use a broker or agent in person. Get several quotes because premiums for the exact same policy can vary widely.
But you want to make sure the insurer will pay when you die, so make sure it's highly rated. Many comparison sites list ratings along with price quotes, or you could check ratings at such sites as StandardandPoors.com, Ambest.com and FitchRatings.com. Insure.com recently released customer satisfaction ratings for large insurers, available online at http://www.insure.com/best-life-insurance-companies. You want to shop around because different insurers vary on how they evaluate different risk factors, such as being a scuba diver or occasional cigar smoker. So, premiums vary.
"Major brands do not march in lock step," Udell said.
What if I already have life insurance?
If you bought a 20-year policy, for example, you're not obligated to keep it for 20 years. You can walk away from a term policy whenever you want.
"There are millions of people out there who are paying too much and don't even know it," Udell said. "If you find a better term policy, why not replace the one you have. It never hurts to look."
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